Municipal Markets in Age of Trump

Event Recap
Tuesday, May 2, 2017; 5-8pm
Bloomberg / PRMIA


Adam Litke, Chief Risk Strategist, Bloomberg L.P.
Adam opened the meeting and introduced the speakers as well as PRMIA. Adam highlighted the importance of forward-looking thinking in risk management especially during times of change.

Navin Sharma (Panel Moderator), Director, Risk and Quantitative Analysis, BlackRock and PRMIA New York Steering Committee

Tax policy reform and infrastructure spending are transformative approaches that were central items for discussion and argument during last year’s elections.  However, the implementation of both, as we all now realize, involves a lengthy time frame with many details remaining to be addressed.  So, our event reviews and discusses the pros and cons of these two issues framed by the history of just such past initiatives.

Tom will speak on the muni market’s history and how it has survived many attempts over the years to usurp its function, perhaps underscoring its intrinsic and symbiotic relationship to US capital markets and the needs of the American public.

Vikram’s focus will primarily be on tax policy and reform.  He will also reflect on, in his view, that tax reform misconceptions lead to the belief that proposed tax policy will severely diminish the municipal market.

George’s thesis on infrastructure compels us to differentiate between infrastructure funding versus widely available financing competing for other public needs such as pensions.

Thomas G. Doe - President and Managing Partner, Municipal Market Analytics, Inc.
Tom provided an overview of tax-reform history as it applies to municipal markets. There have been several attempts to remove the municipal markets exemption over the years.  Thomas highlighted that historically, the administration itself has been important in driving tax-reform changes.

The municipal tax exemption is a challenge for corporate lobbyists who function the federal level, hence making the tax exemption in a way a battle between the federal govt and states around who controls access to resources and capital.

Municipal market issues are becoming more engaged in protecting the exemption and the National Governors Association (NGA) is stepping to the forefront of defending the it.  However, it’s possible that in tax-reform discussions the exemption is traded away for a lower tax-rate and allows private industry to be more engaged in infrastructure discussions.

Foreign holders are buying municipal bonds to demonstrate their interest in being part of the American infrastructure discussion.

Vikram Rai - Director, Head of Municipal Strategy, Citigroup
Removing the tax-exemption is seen as unlikely, and a decrease in the top margin tax rate from 39% may not be too impactful given that the average muni holder tax-rate is 26%, so there may not be a large change in retail-demand.

The largest concern is a cut to the corporate tax-rate, which would come with a very high cost to the federal government and may not generate the expected growth and will likely not pay of itself.

Vikram highlighted that market participants may be overly skeptical about consequential and expensive tax-reforms, especially when the costs can be passed down the road to future market administrations.

Mutual funds are the safety net for municipal security demand if banks and insurance companies step away, which is worrisome as those are driven by inflows and outflows.

George Friedlander - Managing Partner, Court Street Group Research
The challenge for using private sector capital for infrastructure is the need to earn an equity like returns on private capital, and historically private sector involvement in state and local projects has been ineffective.

The cut in marginal tax rates is a very big deal. While municipal securities have not under performed significantly during prior tax-cuts, a lower marginal tax-rate would have a negative effect.

There is a large difference between financing and funding. The amount of financing available for state and local projects is virtually infinite, but the ways to pay for it (original cost of construction + operating and maintenance) are very limited.

Panel Discussion
Adam mentioned that private infrastructure projects have a challenging history in the US given that people expect a certain level of service without paying the tolls for it.

George stated that we are likely to see more use of Public Private Partnerships (PPP) given the advantages technology offers to the private sector. One of the PPP challenges is that there needs to be a revenue source (can’t build a school district this way).

Vikram highlighted that a rise in interest rates (10- year treasuries) would significantly help the funding ratios of pension plans.

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